Trinidad and Tobago: Staff Concluding Statement of the 2023 Article IV Mission
March 16, 2023
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC
:
An International Monetary Fund (IMF) staff team, led by Mr. Camilo E.
Tovar, visited Port of Spain and held discussions on the 2023 Article
IV consultation with Trinidad and Tobago’s authorities during March
1–14. At the end of the consultation, the mission issued the following
statement, which summarizes its main conclusions and recommendations.
Economic recovery is ongoing
1.
Economic activity is recovering
. Real GDP is estimated to have expanded by 2.5 percent in 2022, supported
by the non-energy sector which was partially offset by an
unexpected weak performance of the energy sector. Inflation increased,
reaching 8.7 percent by end-2022, driven by imported energy and food
prices, partial liberalization of domestic fuel prices in 2022, and
domestic floodings. Banks’ credit to the private sector is recovering and
the banking sector appears well-capitalized, liquid, and profitable. The
current account surplus expanded, and foreign reserves coverage remained
adequate at 7.6 months of prospective total imports.
2.
Higher global energy prices and prudent consolidation measures
contributed to a fiscal surplus and a decline in public debt in 2022
. The overall fiscal balance registered a surplus of 0.3 percent of GDP in
FY2022—for the first time in over a decade and after a record deficit of
11.7 percent of GDP in FY2020. The surplus reflects higher than anticipated
energy revenues, some spending cuts relative to the budget, and the
reduction of the fuel subsides. Central government debt declined to 53.8
percent of GDP (from 60 percent of GDP in FY2021) and gross public debt
declined to 71 percent of GDP (from 79.2 percent of GDP in FY2021). Public
financial buffers remain strong with total assets in the Heritage and
Stabilization Fund (HSF) at US$5.0 billion (18.6 percent of GDP) by
end-FY2022.
Positive outlook but looming uncertainties
3.
The recovery is expected to gain broad-based momentum in 2023 with a
3.2 percent GDP expansion.
Over the medium term, new energy projects will come into production but as
oil and gas fields mature, potential growth will slow down to 1.5 percent.
Inflation is projected to slow down to 4.5 percent by end-2023 and will
continue declining with international prices. Waning gas and petrochemicals
exports starting in 2024 and the anticipated decline in global energy
prices, will result in a narrower current account surplus, averaging 6.7
percent of GDP. International reserve coverage is projected to remain
adequate at around 6.5 months of prospective total imports by 2028.
4.
The fiscal position is expected to swing from surplus in FY2022 to a
deficit in FY2023, and then stabilizes at moderate deficits over the
medium term
. The fiscal balance is projected to deliver a deficit of 2.8 percent of
GDP in FY2023. This reflects lower energy revenues due to declining prices
and domestic production, and increased capital spending. The deficit is
expected to persist over the medium term which could widen with the outcome
over the ongoing public sector wage negotiations. Public debt is projected
to reach 74.2 percent of GDP in FY2028, slightly below the government’s new
soft debt target of 75 percent of GDP.
5.
The balance of risks to growth is tilted to the downside
. Downside risks stem from potential disruptions to
domestic oil and gas production; a sharper-than-expected
global slowdown affecting energy markets, and global financial
instabilities. On the upside, there is the potential for
higher-than-expected energy production and prices, including from a new
U.S. license to Trinidad and Tobago to develop a major gas field in
Venezuela.
Preserving fiscal discipline and sustainability
6.
IMF staff welcomes the authorities’ prudent management of the energy
revenue windfall and underscores the importance to continue rebuilding
buffers.
With the economic recovery ongoing, it is recommended to continue prudently
managing the energy revenue windfall, avoiding procyclical spending, and
rebuilding fiscal buffers. IMF staff welcomes the deposit of about US$345
million (1.3 percent of GDP) into the HSF in 2022.
7.
The envisaged expenditure envelope in the FY2023 budget is appropriate,
particularly considering the capital expenditure needs.
The capital expenditure increase will support the economic recovery and
address critical bottlenecks, including in infrastructure. However, it is
necessary to improve the investment execution rate, while ensuring spending
remains efficient and high quality. IMF staff welcomes the decision to
partially liberalize fuel prices as it will improve the efficiency and the
sustainability of the public accounts. It is important to continue
providing targeted and temporary support to alleviate the rising living
costs among the most vulnerable. To confront downside risks, developing a
spending contingency plan would help prevent adverse effects on the fiscal
accounts.
8.
The authorities’ commitment to balance the budget over the medium term
is prudent and welcome.
The recent fiscal measures introduced to mobilize revenues, rationalize
spending, and incentivize private investment will help improve the fiscal
position. To support this, IMF staff recommends further measures to enhance
revenue mobilization, cut down on non-priority current expenditure which
would help maintain debt levels well below the soft debt target. Additional
revenue could be generated through implementing tax reforms and
strengthening the tax administration. It is advised to continue gradually
phasing out subsidies, streamlining transfers to state-owned enterprises
(SOEs), and improving public spending efficiency. The pace and composition
of the adjustment should continue to preserve the spending for the most
vulnerable and for essential capital.
9.
Long-term fiscal risks related to the pension system and the global
energy transition away from fossil fuels need to be addressed.
In the absence of reforms, the National Insurance System’s
deficit is expected to widen, and its reserve be depleted by mid-2030s. IMF
staff welcomes the authorities’ proposal to increase the retirement age to
65 years. Other parametric measures including gradually increasing the
contribution rate could be considered to ensure the long-term financial
viability of the system. Ensuring an energy transition that delivers on the
fiscal objectives and avoids disruptive policy adjustments requires the
design of a sustainable long-term fiscal strategy.
10.
Enhancing the fiscal policy framework would help strengthen planning
and reinforce fiscal sustainability.
A rule-based medium-term fiscal framework would
strengthen policy formulation, help avoid procyclical spending, and
mitigate fiscal risks. A formal fiscal anchor with an
escape clause for unexpected events, could help support the accumulation of
financial buffers during periods of high energy prices and delink
expenditure from energy revenue volatility, while ensuring the transfers of
funds into and out of the HSF. Developing a sound debt management strategy
would mitigate macroeconomic and financial stability risks.
Maintaining a consistent monetary and exchange rate policy
11.
IMF staff encourages
the authorities to continue maintaining sound and consistent policies
to support the current exchange rate arrangement.
The Central Bank of Trinidad and Tobago (CBTT) has maintained its repo rate
at 3.5 percent since March 2020 to support the recovery of the economy.
Increasing the policy rate should be seriously considered to contain
inflationary pressures and narrow the negative interest rate differentials
with the U.S. monetary policy rate. This would also help mitigate potential
risks of capital outflows and reduce incentives for excessive risk taking
that could threaten financial stability.
12.
A
more efficient FX infrastructure would help eliminate FX shortfalls.
It would also help create a more conducive business environment for the
private sector to invest and diversify the economy. Over the medium term,
greater exchange rate flexibility would reduce the need for fiscal policy
adjustments to restore external balance and create room for more
countercyclical monetary policy. IMF staff encourages the authorities to
remove all restrictions on current international transactions while
providing sufficient FX to meet demand for all current international
transactions.
Reinforcing financial stability
13.
The authorities need to remain vigilant to potential vulnerabilities in
the financial system.
While the system appears sound and resilient, it faces
potential vulnerabilities emanating from rising household and businesses’
debt, high exposures to the sovereign, and interconnectedness.
Closely monitoring financial sector risks is warranted.
14.
The authorities are encouraged to further strengthen the financial
regulatory and supervisory framework.
IMF staff welcomes the progress towards enhancing the resilience of the
banking and insurance sectors in line with the recommendations of the
2020 Financial System Stability Assessment (FSAP)
. Going forward, it is encouraged to make progress on: (i)
orderly transforming the investment fund sector from constant to variable
net asset value; (ii) enhancing the consolidated supervision of
conglomerate groups; (iii) providing the CBTT with explicit macroprudential
authority and tools; and (iv) strengthening supervisory resource and
independence in line with international best practices.
15.
Trinidad and Tobago is actively embracing Fintech for financial
inclusion and development, while working on mitigating its potential
risks.
The authorities are leveraging on new technologies to improve the delivery
of financial services, boost financial inclusion, and modernize the payment
system. IMF staff welcomes the authorities’ efforts, in collaboration with
IMF Technical Assistance, to develop the Fintech ecosystem, including by
establishing the Joint Regulatory Hub, launching a Regulatory Sandbox,
developing the payment system, and strengthening the cybersecurity.
16.
IMF staff welcomes the authorities’ progress to enhance the financial
integrity and international tax transparency frameworks.
Following the removal of Trinidad and Tobago from the Financial Action Task
Force (FATF) monitoring list in February 2020, the authorities are
encouraged to further strengthen the AML/CFT framework, through making
beneficial ownership available including for the procurement sector through
the finalization of amendments to the public procurement act, and adopting
risk-based AML/CFT supervision. IMF staff welcomes the authorities’
commitment and efforts to addressing issues related to the EU’s Commission
Tax Blacklist and the OECD Global Forum requirements on Exchange of
Information Request and the Automatic Exchange of Information Standards.
Promoting economic diversification and a green economy
17.
There is a need to step up the efforts to secure an economic
transformation to deliver a sustainable and inclusive economy
.
The energy sector will remain the country’s main growth engine in the near
to medium term. IMF staff welcomes the authorities’
efforts to take advantage of its existing petrochemical
infrastructure and know-how to transition into clean energy. At the same
time there is scope to diversify its exports products and markets.
18.
The economic diversification process requires supporting policies to
address structural bottlenecks.
In addition to a sound and stable macroeconomic environment, the
authorities are encouraged to step up their efforts towards improving the
business environment by delivering on measures (e.g., infrastructure,
governance, trade policy, education) laid out in the Vision 2030. IMF staff
welcomes the country’s digitalization agenda to deliver more efficient
public services, improve the business environment, and enhance the social
safety net.
19.
The authorities’ actions to reduce
greenhouse gas emissions are commendable
. Several renewable energy projects are being developed to meet the 30
percent target of renewable energy sources by 2030. IMF staff encourages
the authorities to continue advancing on these initiatives and welcomes
their new green hydrogen strategy for the energy transition. Efforts to integrate the climate change
considerations in the financial sector supervision are also welcome.
Enhancing the adequacy of statistics
20.
IMF staff welcomes the progress to
improve the quality, timeliness, and coverage of macroeconomic
statistics, but some challenges remain.
Transforming the Central Statistical Office into an independent National
Statistical Institute would help strengthen the country’s institutional
capacity. It is encouraged to continue building on the recent efforts to
broaden fiscal data coverage of SOEs and other public bodies.
The IMF team is grateful to the authorities and a broad range of public
and private sector counterparts for their warm hospitality,
cooperation, and constructive discussions.
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